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Chapter 3

Identifying Strategic Capabilities

By the end of this chapter, you will be able to:

• understand the differences between resources, capabilities and dynamic capabilities

• identify the tangible and intangible resources which contribute to capabilities

• assess how capabilities contribute to competitive advantage.

LEARNING OBJECTIVES

The Resource-Based View

Every organization is unique by virtue of its history, experience, processes and products, mar-ket position and organizational culture. The challenge is to make this uniqueness the source of sustainable competitive advantage. The resource-based view of strategy is concerned with identifying and building on such strengths or capabilities. The most in! uential business ana-lysts promoting and developing the notion of ‘core competencies’ have been Gary Hamel and C. K. Prahalad.1 Their basic ideas can be summarized as follows:

• The sustainable competitive advantage of " rms resides not in their products but in their core competencies: ‘The real sources of advantage are to be found in management’s ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities’ (p. 81).

• Core competencies feed into more than one core product, which in turn feed into more than one business unit. They use the metaphor of the tree:

˚ End products ! Leaves, ! owers and fruit

˚ Business units ! Smaller branches

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42 Part 1 Foundations of Managing Innovation

˚ Core products ! Trunk and major limbs

˚ Core competencies ! Root systems.

Examples of core competencies include Sony in miniaturization, Philips in optical media, 3M in coatings and adhesives and Canon in the combination of the precision mechanics, " ne optics and microelectronics technologies that underlie all their products (Table 3.1). Examples of core products include Honda in lightweight, high-compression engines and Matsushita in key components in videocassette recorders.

At one level the identi" cation of competence appears to pose few dif" culties.However, for core competence to be a tool of strategic analysis what is also required

is a means for " rms to analyse rigorously their own and their competitors’ competencies. Yet, despite all the effort and attention, Coyne, Hall and Clifford3 writing in The McKinsey Quarterly in early 1997, note how elusive core competencies remain: ‘Few managers we have talked to could claim to have utilised core competence to achieve success in the marketplace, and even fewer to have built a core competence from scratch . . . Indeed, most were uncertain as to exactly what quali" es a core competence . . . it is like a mirage: something that from a distance appears to offer hope . . . but turns to sand when approached’ (p. 41).

Our own experience in working with the concept of core competence supports their view.

Competencies disappear all too easily under close examination. A careful scrutiny of competence claims reveals, all too often, that they are neither " rm-speci" c nor sustainable, that they convey neither value to the customer nor generic qualities to the " rm.

Distinguishing Capabilities from Resources

Dynamic capabilities are central to innovation strategy and yet despite twenty years’ devel-opment and many theoretical contributions, the conceptualization, operationalization and application of the resource-based and dynamic capabilities’ views of strategic management remains problematic. For instance, there is no consensus de" nition of dynamic capabilities.4

Resource-Based ViewThe resource-based view (RBV) of strategy proposes that competitive advantage is primarily driven by a " rm’s valuable, rare, inimitable and non-substitutable resources.5 The underlying assumption is that resources are heterogeneous across organizations and that this heterogene-ity can sustain competitiveness over time.

Resources are stocks of available factors that are owned, controlled or accessed on a preferential basis by the " rm.6 Resources are primarily having (stock) rather than doing (! ow) forms.7 ‘Having’ resources can be tangible, like location, material, building, inventory,

Case Study of Marshalls illustrating the building-up of competencies over!a sustained period is available on!the Innovation Portal at www.innovation-portal.info



Chapter 3 Identifying Strategic Capabilities 43

TABLE 3.1 Innovation in action: Core competencies at Canon

Competencies

Product Precision mechanics Fine optics Microelectronics

Basic camera X X

Compact fashion camera X X

Electronic camera X X

EOS autofocus camera X X X

Video still camera X X X

Laser beam printer X X X

Colour video printer X X

Bubble jet printer X X

Basic fax X X

Laser fax X X

Calculator X

Plain paper copier X X X

Colour copier X X X

Laser copier X X X

Colour laser copier X X X

Still video system X X X

Laser imager X X X

Cell analyser X X X

Mask aligners X X

Stepper aligners X X

Excimer laser aligners X X X

Source: Prahalad, C. and G. Hamel (1990) The core competencies of the corporation. Harvard Business Review, May–June, 79–91 Table: Core competencies at Canon”. Reproduced with permission.

According to Christer Oskarsson2:

‘In the late 1950s . . . the time had come for Canon to apply its precision mechanical and optical technolo-gies to other areas [than cameras] . . . such as business machines. By 1964 Canon had begun by developing the world’s " rst 10-key fully electronic calculator . . . followed by entry into the coated paper copier market with the development of an electrofax copier model in 1965, and then into . . . the revolutionary Canon plain paper copier technology unveiled in 1968 . . . Following these successes of product diversi" cation, Canon’s product lines were built on a foundation of precision optics, precision engineering and electronics. . .

The main factors behind . . . increases in the numbers of products, technologies and markets . . . seem to be the rapid growth of information technology and electronics, technological transitions from analogue to digital technologies, technological fusion of audio and video technologies, and the technological fusion of electronics and physics to optronics (pp. 24–26).




machinery and low-cost employees, or less tangible like employee skills, patents, databases, licences, brand and copyright.

These resources are normally available to most " rms, tradable in the market and exog-enous. In contrast, ‘doing’ resources, or capabilities, are more " rm-speci" c, less tradable in the market and more dif" cult to imitate. Examples of ‘doing’ resources are capabilities incor-porated in organizational and managerial processes like product development, technology development and marketing (Figure 3.1).

Dynamic CapabilitiesCapabilities refer to the organization’s potential for doing, or carrying out a speci" c activ-ity or set of activities. Such capabilities tend to consist of a combination or con" guration of resources. At the most basic level these can be the basic operational or functional activities of the " rm, for example design, manufacturing or sales capability. These typically contrib-

ute directly to the creation of value from current pro-cesses, products and services (Figure 3.2). For example, Zara has successfully integrated design, clothing manu-facture and IT to create a capability to introduce new clothing designs more rapidly and frequently than its competitors.

At a higher level, dynamic capabilities include abili-ties to improve, adapt, and innovate.8 Dynamic capa-

bilities are dedicated to the modi" cation of operational capabilities and lead, for example, to changes in the " rm’s products or production processes.9 For example, TSMC has, over successive technology generations, continued to develop a dynamic capability in semiconduc-tor manufacture based on deep codi" ed scienti" c knowledge, tacit knowledge of materials manufacturing and cumulative experience and learning (Innovation in Action 3.1).

David Teece’s original de" nition as ‘the " rm’s ability to integrate, build, and recon" gure internal and external competences to address rapidly changing environments’ is rather broad and dif" cult to operationalize, so many authors have since offered their own de" nitions of

Growth inmarketshareImproved image/

reputation/brand

Betterrelative value

Higherrelative quality

Lowrelative costs

Processinnovation

Productinnovation

FIGURE 3.1 Relationship between innovation and performance in fast-moving consumer goods

Source: Clayton, T. and G. Turner (2012) Brands, innovation and growth. In Tidd, J. (ed.) From Knowledge Management to Strategic Competence: Measuring technological, market and organizational innovation. Imperial College Press, London. Copyright Imperial College Press/World Scienti" c Publishing Co.

Case Study of Zara providing a more detailed view of building up competencies and capabilities around!‘fast fashion’ is available on!the Innovation Portal at www.innovation-portal.info




Corecompetencies

(create identity &value)

Dynamic capabilities(integration & innovation)

Operational capabilities (doingresources)

Resources (having assets)

FIGURE 3.2 Resource base of the company: A hierarchical classi" cation

Taiwan Semiconductor Manufacturing Company (TSMC)

TSMC was established in Taiwan in 1987 to become the world’s " rst dedicated semiconductor foundry. This so-called pure-play foundry business represented a novel business model because, unlike conventional vertically integrated manufacturers, TSMC’s customers are fab-less semi-conductor design houses such as Qualcomm, Broadcom and NVIDIA.

The cost of building and operating fabrication facilities has become prohibitive for all but the very largest companies, such as Intel and Samsung, especially in the case of complex logic applications. Even AMD (Advanced Micro Devices) separated its design and manufacturing businesses in 2008.

The headquarters and main fabrication plants are located in Hsinchu, Taiwan, but it also operates two wholly owned subsidiaries, WaferTech in the United States and TSMC China Company Limited, and a joint venture fabrication in Singapore, SSMC. Its core business is mask production, wafer manufacturing, assembly and testing, but it also provides design and prototyping services. In 2010, it joined the top-ten semiconductor R&D spenders, to reach $945 million (£580 million), equivalent to 7% of sales (called the R&D-intensity), the highest of any pure foundry business. By comparison, the number-one R&D spender in that industry that year was Intel, at $6.6 billion (£4 billion; 17% of sales), and in second place Samsung, at $2.6 billion (£1.6 billion; 8% of sales).

INNOVATION IN ACTION 3.1

(continued )




In 2011, the company’s production capacity reached 13.2 million eight-inch equivalent wafers, and TSMC had more than 450 customers, manufacturing more than 8300 products for computer, communications and consumer electronics applications. In 2012, a partnership between TSMC and Apple began production of the A5 (dual core) and A6 chip for Apple’s next-generation iPads and iPhones. TSMC has bene" ted from the growth in smart mobile devices, and it is estimated that every tablet sold globally contributes about $7 (£4) to its income. In 2011–2012, it made sales of $14 billion (£8 billion), and by specializing in high-technology, capital-intensive contract manufacture it maintained high gross-pro" t margins, of around 40%, although pro" tability is dependent on closely matching capacity and demand.

dynamic capabilities.10 Despite being one of the most widely used and cited concepts, the central construct of dynamic capabilities is not well or universally de" ned.

Rather than trying to de" ne such a complex concept, a more useful way of identifying and operationalizing dynamic capabilities is to focus on the functions of dynamic capability. In other words, we ask: ‘What does dynamic capability do?’ instead of ‘What is dynamic capability?’ For example:

• Sensing opportunities and threats11

• Absorptive and adaptive capability12

• Enhancing, combining, protecting and, where necessary, recon" guring tangible and intangible resources.13

Assessing Capabilities

One of the most dif" cult challenges in practice is to identify capabilities. This technique for analysing tangible and intangible resources is based on the identi" cation and development of the strengths in the key product development and delivery system attributes and the intangible resources which produce them. The method consists of three parts:14

• Identifying the key attributes of the most successful products and services offered by the organization.

Tool to help you to explore this idea of identifying capabilities in detail is available on the Innovation Portal at www.innovation-portal.info

• Mapping these attributes to the resources or compe-tencies of the organization, including tangible and intangible resources.

• Assessing the potential for sustaining, protecting and exploiting these resources, including knowledge management.




Identifying Key AttributesA pragmatic view on the nature of competitive advantage is advanced by Coyne, whose argument starts with the observation that any company which is making repeat sales in a competitive market must enjoy an advantage in the eyes of the customers who are making the repeat purchases.15

He goes on to argue that for a sustainable competitive advantage to exist three conditions must apply:

• Customers must perceive a consistent difference in important attributes between the pro-ducer’s product/service and the attributes offered by competitors.

• This difference is the direct consequence of a capability gap between the producer and its competitors.

• Both the difference in important attributes and the capability gap can be expected to endure over time.

Coyne suggests that there are four, and only four, types of resource capability:

• Regulatory: the possession of legal entities (e.g. patents and trademarks).• Positional: the results of previous endeavour (e.g. reputation, trust, value chain

con" guration)• Business systems: the ability to do things well (e.g. consistent conformance to speci" cation)• Organizational characteristics (e.g. the ability to manage change).

It is now possible to ask: ‘What is the nature of the package of product/delivery system attributes which customers value?’ and to go on to ask: ‘What is responsible for producing the valued attributes?’ The product/delivery system attributes will include factors such as price, quality, speci" cation and image.

The Valued Attributes

It may be necessary to identify different rankings for different categories of customers (e.g. new as opposed to long-standing customers, retailers as opposed to end users).

In carrying out this analysis of attributes it is appropriate to seek consensus between the relevant executives with respect to questions such as:

• Can executives agree an importance weighting for each attribute?• Can executives agree a benchmark score for each attribute compared with the competition?• Can executives agree the sustainability of the advantage represented by each attribute?

The degree of congruence, or dissonance, in executives’ perceptions of these issues can in itself be illuminating.

In addition to identifying the current strengths in the marketplace it is also appropriate at this stage to identify known de" ciencies in the product offering.




Image: What is the image of the product range? Is it important?Price: Is a low-selling price a key buying criterion?User friendliness: Is it important for the product to be user friendly?Availability: Is product range availability crucial?Rapid response to enquiry: Is it important to produce designs, quotations, etc. very quickly?Quick response to customer demand: Will sales be lost to the competition if they respond more quickly than you do?Width of product range: Is it important to offer a wide range of products and/or services to customers?New product to market time: How important is the product development time?Quality – the product’s ! tness for purpose: Does the product, or service, deliver exactly the bene" ts which the customers want?Quality – the consistent achievement of de! ned speci! cation: Is constant conformance to spec. vital?Safety: Is safety in use a major concern?Regulatory requirements: Does meeting regulatory requirements earlier/better than the competi-tion give a competitive advantage?Degree of innovation: Is it important for the product or service to represent ‘state of the art’?Ability to vary product speci! cation: Is it important to produce product or service modi" cations easily and quickly?Ability to vary product volume: Is it important to be able to increase, or decrease, production volume easily?Customer service: Is the quality of the overall service which customers receive a key to winning business?Pre- and after-sales service: Is the supply of advice, spares, etc. a key aspect of winning business?

BOX 3.1: TYPICAL PRODUCT/DELIVERY SYSTEM ATTRIBUTES WHICH DEFINE COMPETITIVE ADVANTAGE

Mapping Attributes to Resources and CompetenciesThe important characteristics of strategic competencies are:

• They are responsible for delivering a signi" cant bene" t to customers.• They are idiosyncratic to the " rm.• They take time to acquire.• They are sustainable because they are dif" cult and time-consuming to imitate.




• They comprise con! gurations of resources.• They have a strong tacit content and are socially complex – they are the product of expe-

riential learning.

The resources which produce product/delivery system attributes can now be placed in a framework of capabilities:

Regulatory Capability

Regulatory capability comprises resources which are legal entities.

• tangible, on balance sheet, assets• intangible, off balance sheet, assets, e.g.:

˚ patents

˚ licences

˚ trademarks

˚ contracts

˚ protectable data.

Positional Capability

Positional capability comprises resources which are not legal entities and are the result of previous endeavour, that is with a high path dependency:

• reputation of company• reputation of product• corporate networks• personal networks• unprotectable data

• distribution network• supply chain network• formal and informal operating systems• processes.

Functional Capability

Functional capability comprises resources which are either individual skills and know-how or team skills and know-how, within the company, at suppliers, at distributors, etc.

Case Study of Tesco in which you can see the ways in which competitive

advantage can be constructed through building capabilities is

available on the Innovation Portal at www.innovation-portal.info

• employee know-how and skills in:

˚ operations

˚ " nance

˚ marketing

˚ R&D, etc.

• supplier know-how• distributor know-how• professional advisors’ expertise, etc.

Case Study of Corning giving an idea of how capabilities are built and!deployed over time is available!on!the Innovation Portal at www.innovation-portal.info

Cultural Capability

Cultural capability comprises resources which are the characteristics of the organization:

• perception of quality standards• tradition of customer service

• ability to manage change• ability to innovate




• ability to work in a team• ability to develop staff, suppliers and distributors• automatic response mechanisms.

While it is possible for a valued product/delivery system attribute to be the result of a tangible asset such as a building or a specialist manufacturing capability, research and experience suggest intangible resources such as product reputation, employee know-how, etc. are the factors most often responsible for producing the attributes which are valued by customers. The identi" cation of the intangibles which are responsible for each key product attribute results in a summary such as that shown in Table 3.2.

The resources which occur frequently in the body of the matrix are those which, either by themselves or in combination with others, constitute the organization’s strategic competencies.

Assessing the Potential for Sustaining, Protecting and Exploiting!CompetenciesHaving identi" ed the key resources, it is appropriate to examine development scenarios in terms of protection, sustenance, enhancement and leverage.

TABLE 3.2 An Example of the Matrix of Attributes and Resources

The resources which produce, or do not produce, the key attributes:

Key product/Delivery attributes

Regulatory Capability

Positional Capability

Functional Capability

Cultural Capability

Strengths

1. e.g. availability Value chain Con" guration

Forecasting skills

2. e.g. quality High perception of quality

3. e.g. speci" cation Patent ‘abc’ Technology ‘xyz’

Etc.

Weaknesses

1.

2.

Summary of the key resources




This approach to the analysis of intangible resources is the acquisition of a new perspec-tive and language that enable them to codify the tacit knowledge which they have of their companies. In particular, executives have welcomed the, sometimes new, emphasis placed on issues such as:

• How can the key resource of reputation be protected, enhanced and leveraged?• How can management ensure that every employee is disposed to be both a promoter and

custodian of the reputation which employs him/her?

With Respect to Protection

• Do all concerned recognize the value of this intangible resource to the company?• Can the resource be protected in law?

With Respect to Sustainability

• How long did it take to acquire this resource?• Is it unique because of all that has happened in creating it?• How durable is the resource; will it decline with time?• How easily may the resource be lost?• How easily and quickly can others identify and imitate the resource?• Can others easily ‘buy’ the resource?• Can others easily ‘grow’ the resource?• How appropriable is the resource? Can it ‘walk away’?• Is the resource vulnerable to substitution?

With Respect to Enhancement

• Is the ‘stock’ of this resource increasing?• How can we ensure that the ‘stock’ of this resource continues to increase?

With Respect to Exploitation

• Are we making the best use of this resource?• How else could it be used?• Is the scope for synergy identi" ed and exploited?• Are we aware of the key linkages which exist between the resources?

BOX 3.2: ISSUES WITH RESPECT TO THE DEVELOPMENT OF INTANGIBLE RESOURCES




• What are the key areas of employee know-how?• Can they be codi" ed?• How long do they take to acquire?• Is the business organised so that working and learning are the same?

This can help de" ne what an organization needs to do over time to maintain and renew resources and competencies. Effective management is about knowing where to locate knowl-edge resources and the organizational linkages that integrate them together to create compe-tencies. Managing this process is a purposive activity. It requires resources. The objectives of the framework are:

• to enable an organization to map its resources and the key linkages between them• to act as an elicitation device to facilitate a discussion about the meaning and action

required – in terms of core competencies and knowledge resources.

First, position each of the competencies identi" ed in Stage 2 by placing each of them at a point on the codi" cation and diffusion scales. The relevant population for diffusion needs to be de" ned: rather different data are generated when the diffusion population is the " rm as opposed to the industry, for example. For discussions about competence it is often help-ful to explore how widely knowledge about technologies and linkages are shared within the " rm and within the industry. Comparing " rm- and industry-level diffusion patterns can help " rms to recognize that, while a particular technology may not be widely diffused within the " rm, it is widely diffused among other " rms in the industry. In this way, participants avoid the trap of believing that because something is new to them it is also new to their competitors.

An example of a codi" cation scale is as follows:

Codi! ed

• Can be totally automated.• Can be partially automated.• Can be systematically described.• Can be described and put down on paper.• Can be shown and described verbally.• Can be shown inside someone’s heard.

Uncodi! ed

An example of a diffusion scale to be used at the industry level is:

DiffusedKnown by all " rms in all industries.Known by many " rms in all industries.Known by many " rms in many industries.



Joe

"heard" should be "head"


Known by many " rms in a few industries.Known by a handful of " rms in a few industries.Known by only a handful of " rms in one industry.Known only by one " rm in one industry.

UndiffusedSuch scales may appear rather inexact but, for this purpose, they are exact enough.We can use these ‘maps’ of competencies to help to identify the management action needed.

Creating and Capturing Value

Capabilities do not necessarily translate into value or competitive advantage. The capacity of the " rm to appropriate the bene" ts of its investment in capabilities depends on two factors: (i) the " rm’s capacity to translate its capabilities into commercially viable products or pro-cesses; (ii) the " rm’s capacity to defend its advantage against imitators. Some of the factors that enable a " rm to bene" t commercially from its capabilities can be strongly shaped by its management, for example the provision of complementary assets to exploit the lead. Other factors can be in! uenced only slightly by the " rm’s management, and depend much more on the general nature of the technology, the product market and the regime of intellectual prop-erty rights, for example the strength of patent protection. We can identify nine factors which in! uence the " rm’s capacity to bene" t commercially from its capabilities:

1. Secrecy2. Accumulated tacit knowledge3. Lead times and after-sales service4. The learning curve5. Complementary assets6. Product complexity7. Standards8. Pioneering radical new products9. Strength of patent protection.

We begin with those over which management has some degree of discretion for action, and move on to those where its range of choices is more limited.

1. Secrecy is considered an effective form of protection by industrial managers, especially for process innovations. However, it is unlikely to provide absolute protection, because some process characteristics can be identi" ed from an analysis of the " nal product, and because process engineers make up a professional community and talk to each other and move from one " rm to another, so that information and knowledge inevitably leak out.




2. Accumulated tacit knowledge can be long and dif" cult to imitate, especially when it is closely integrated in speci" c " rms and regions. Examples include product design skills, ranging from those of Zara in clothing design to those of Rolls-Royce in aircraft engines.

3. Lead times and after-sales service are considered by practitioners as major sources of pro-tection against imitation, especially for product innovations. Taken together with a strong commitment to product development, they can establish brand loyalty and credibility, accelerate the feedback from customer use to product improvement, generate learning-curve cost advantages (see below) and therefore increase the costs of entry for imitators.

4. The learning curve in production generates both lower costs and a particular and powerful form of accumulated and largely tacit knowledge that is well recognized by practitioners. In certain industries and technologies (e.g. semiconductors, continuous processes), the " rst-comer advantages are potentially large, given the major possibilities for reducing unit costs with increasing cumulative production. However, such ‘experience curves’ are not automatic, and require continuous investment in training and learning.

5. Complementary assets. The effective commercialization of an innovation very often depends on assets (or competencies) in production, marketing and after-sales to comple-ment those in technology. For example, EMI did not invest in them to exploit its advances in electronic scanning. On the other hand, strong complementary assets enabled IBM to catch up in the personal computer market.

6. Product complexity. Product complexity is recognized by managers as an effective barrier to imitation. Contrast the personal computer and commercial aircraft industries. With the advent of the microprocessor and standard software, the technological barriers to imitation in personal computers are low, resulting in strong competition from low-cost economies. In contrast, Boeing and Airbus have faced no such threat to their positions in large civilian aircraft, since the costs and lead times for imitation remain very high.

7. Standards. The widespread acceptance of a company’s product standard widens its own market and raises barriers against competitors. The market leader normally has the advan-tage in a standards war, but this can be overturned through radical technological change, or a superior response to customers’ needs. Competing " rms can adopt either ‘evolution-ary’ strategies minimizing switching costs for customers (e.g. backwards compatibility with earlier generations of the product) or ‘revolutionary’ strategies based on greatly supe-rior performance–price characteristics, such that customers are willing to accept higher switching costs.

8. Pioneering radical new products. It is not necessarily a great advantage to be a techno-logical leader in the early stages of the development of radically new products, when the product performance characteristics, and features valued by users, are not always clear, either to the producers or to the users themselves. Especially for consumer products, val-ued features emerge only gradually through a process of dynamic competition, which involves a considerable amount of trial, error and learning by both producers and users. New features valued by users in one product can easily be recognized by competitors and incorporated in subsequent products. This is why market leadership in the early stages of the development of personal computers was so volatile, and why pioneers are often displaced by new entrants. Pioneers in radical consumer innovations rarely succeed in establishing long-term market positions.




9. Strength of patent protection can be a strong determinant of the relative commercial bene" ts to innovators and imitators. Patents are judged to be more effective in protecting product innovations than process innovations in all sectors except petroleum re" ning, probably re! ecting the importance of improvements in chemical catalysts for increasing process ef" ciency. It also shows that patent protection is rated more highly in chemical-related sectors (especially drugs) than in other sectors. This is because it is more dif" cult in general to ‘invent round’ a clearly speci" ed chemical formula than round other forms of invention.

Radically new technologies are now posing new problems for the protection of intel-lectual property, including the patenting system. The number of patents granted to protect software technology is growing in the United States, and so are the numbers of " nancial institutions getting involved in patenting for the " rst time. Debate and controversy surround important issues, such as the possible effects of digital technology on copyright protection, the validity of patents to protect living organisms and the appropriate breadth of patent protec-tion in biotechnology.

Finally, we should note that " rms can use more than one of the above nine factors to defend their innovative lead. For example, in the pharmaceutical industry secrecy is para-mount during the early phases of research, but in the later stages of research patents become critical. Complementary assets such as global sales and distribution become more impor-tant at the later stages. Despite all the merger and acquisitions in this sector, these factors, combined with the need for a signi" cant critical mass of R&D, have resulted in relatively stable international positions of countries in pharmaceutical innovation over a period of some 70 years. Firms typically deploy all the useful means available to them to defend their innovations against imitation.

In some cases the advantages of pioneering technology, intellectual property and stand-ards combine to create a sustainable market position.

Beware of Core Rigidities

As Dorothy Leonard-Barton points out, ‘core competencies’ can also become ‘core rigidities’ in the " rm, when established competencies become too dominant.16 In addition to sheer habit, this can happen because established competencies are central to today’s products, and because large numbers of top managers may be trained in them. As a consequence, important new competencies may be neglected or underestimated (e.g. the threat to main-frames from mini- and microcomputers by manage-ment in mainframe companies). In addition, established innovation strengths may overshoot the target. Many examples show that when ‘core rigidities’ become " rmly entrenched their removal often requires changes in top management.

Case Study of Polaroid illustrating some of these themes in much greater

detail is available on the Innovation Portal at www.innovation-portal.info




Capabilities and Cognition at Polaroid

Polaroid was a pioneer in the development of instant photography. It developed the " rst instant camera in 1948, the " rst instant colour camera in 1963, and introduced sonar automatic focusing in 1978. In addition to its competencies in silver halide chemistry, it had technological competen-cies in optics and electronics, and mass manufacturing, marketing and distribution expertise. The company was technology-driven from its foundation in 1937, and the founder Edwin Land had 500 personal patents. When Kodak entered the instant photography market in 1976, Polaroid sued the company for patent infringement, and was awarded $924.5 million (£566 million) in damages. Polaroid consistently and successfully pursued a strategy of introducing new cameras, but made almost all its pro" ts from the sale of the " lm (the so-called razor-blade marketing strategy also used by Gillette), and between 1948 and 1978 the average annual sales growth was 23%, and pro" t growth 17% per year.

Polaroid established an electronic imaging group as early as 1981, as it recognized the potential of the technology. However, digital technology was perceived as a potential techno-logical shift, rather than as a market or business disruption. By 1986 the group had an annual research budget of $10 million (£6 million), and by 1989 42% of the R&D budget was devoted to digital imaging technologies. By 1990 28% of the " rm’s patents related to digital technolo-gies. Polaroid was therefore well positioned at that time to develop a digital camera business. However, it failed to translate prototypes into a commercial digital camera until 1996, by which time there were 40 other companies in the market, including many strong Japanese camera and electronics " rms. Part of the problem was adapting the product development and marketing channels to the new product needs. However, other more fundamental problems related to long-held cognitions: a continued commitment to the razor-blade business model, and pursuit of image quality. Pro" ts from the new market for digital cameras were derived from the cameras rather than the consumables (" lm). Ironically, Polaroid had rejected the development of ink-jet printers, which rely on consumables for pro" ts, because of the relatively low quality of their (early) outputs. Polaroid had a long tradition of improving its print quality to compete with conventional 35mm " lm.

Source: Tripsas, M. and G. Gavetti (2000) Capabilities, cognition, and inertia: Evidence from digital imaging. Strategic Management Journal, 21, 1147–61. Reproduced by permission of John Wiley & Sons, Ltd.

INNOVATION IN ACTION 3.2




Summary

• Resources can be tangible – including assets, plant and equipment and location – or intangible – such as employee skills and intellectual property. However, as these are generally freely available in the market they do not necessarily in isolation confer a sustainable competitive advantage.

• Capabilities are more functional than resources, and by de" nition are rare combinations of resource which are dif" cult to imitate and create value for the organization.

• Dynamic capabilities allow organizations to adapt, innovate and renew, and are there-fore critical in conditions of uncertainty and for long-term growth.

• Capabilities create value and contribute to competitiveness a number of ways, including the ability to differentiate processes and products which are dif" cult to imitate.

Further Resources

For recent reviews of the core competence and dynamic capability perspectives, see David Teece’s Dynamic Capabilities and Strategic Management: Organizing for innovation and growth (Oxford University Press, 2011), Joe Tidd (ed.) From Knowledge Management to Strategic Competence (Imperial College Press, third edition, 2012) and Connie Helfat’s Dynamic Capabilities: Understanding strategic change in organizations (Blackwell, 2006). Lockett, Thompson and Morgenstern (2009) provide a useful review in ‘The development of the resource-based view of the " rm: A critical appraisal’, International Journal of Management Reviews, 11 (1), as do Wang and Ahmed (2007), ‘Dynamic capabilities: A review and research agenda’, International Journal of Management Reviews, 9 (1).

References

1. Prahalad, C. and G. Hamel (1990) The core competence of the corporation. Harvard Business Review, 68 (3): 79–91.

2. Oskarsson, C. (1993) Technology Diversi! cation: The phenomenon, its causes and effects. Gothenburg: Department of Industrial Management and Economics, Chalmers University.

3. Coyne, K. P., S. J. D. Hall and P. G. Clifford (1997) Is your Core Competence a Mirage?, The McKinsey Quarterly, 1: 40–54.




4. Keupp, M. M., M. Palmié and O. Gassmann (2012) The strategic management of innovation: A systematic review and paths for future research. International Journal of Management Reviews, 14 (1): 367–390.

5. Barney, J. B. (1991) Firm resources and sustained competitive advantage, Journal of Management, 17 (1): 99–120; Barney, J. B. (2001) Is the resource-based ‘view’ a useful perspective for strategic management research? Yes, Academy of Management Review, 26 (1): 41–56; Barney, J. B. (2001) Resource-based theories of competitive advantage: A ten-year retrospective on the resource-based view, Journal of Management, 27: 643–650; Barney, J. B. (2002) Gaining and Sustaining Competitive Advantage, 2nd edn, Upper Saddle River, NJ: Prentice Hall.

6. Amit, R. and P. J. H. Schoemaker (1993) Strategic assets and organisational rent, Strategic Management Journal, 14: 33–46; Helfat, C. E., S. Finkelstein, W. Mitchell et al. (2007) Dynamic Capabilities: Understanding strategic change in organisations, Malden: Blackwell Publishing.

7. Hall, R. (1992) The strategic analysis of intangible resources, Strategic Management Journal, 13: 135–144; Hall, R. (1993) A framework linking intangible resources and capabilities to sustainable competitive advantage, Strategic Management Journal, 14: 607–618.

8. Zollo, M. and S. G. Winter (2002) Deliberate learning and the evolution of dynamic capabilities, Organization Science, 13 (3): 339–351; Winter, S. G. (2003) Understanding dynamic capabilities, Strategic Management Journal, 24: 991–995.

9. Helfat, C. E. and M. A. Peteraf (2003) The dynamic resource-based view: Capability lifecycles, Strategic Management Journal, 24, 997–1010; Zahra, S. A., H. J. Sapienza and P. Davidsson (2006) Entrepreneurship and dynamic capabilities: A review, model and research agenda, Journal of Management Studies, 43 (4): 917–955.

10. Teece, D. J. and G. Pisano (1994) The dynamic capabilities of " rms: An introduc-tion, Industrial and Corporate Change, 3, 537–556; Teece, D. J. (2000) Strategies for managing knowledge assets: The role of " rm structure and industrial context, Long Range Planning, 33 (1): 35–54; Teece, D. J. (2006) Explicating Dynamic Capabilities: The nature and microfoundations of (long run) enterprise perfor-mance, University of California, Berkeley: WP; Teece, D. J. (2007) Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance, Strategic Management Journal, 28 (13): 1319–1350.

11. Pavlou, P. A. and O. A. E. Sawy (2011) Understanding the elusive black box of dynamic capabilities. Decision Sciences, 42 (1): 239–273.

12. Wang, C. L. and P. K. Ahmed (2007) Dynamic capabilities: A review and research agenda, International Journal of Management Reviews, 9 (1): 31–51; Lockett,




A., S. Thompson and U. Morgenstern (2009) The development of the resource-based view of the " rm: A critical appraisal, International Journal of Management Reviews, 11 (1): 9–28; Ellonen, H. K., A. Jantunen and O. Kuivalainen (2011) The role of dynamic capabilities in developing innovation-related capabilities, International Journal of Innovation Management, 15 (3): 459–478.

13. Danneels, E. (2002) The dynamics of product innovation and " rm competences, Strategic Management Journal, 23: 1095–1121; Danneels, E. (2007) The process of technological competence leveraging, Strategic Management Journal, 28 (5): 511–533; Danneels, E. (2008) Organizational antecedents of second-order com-petences, Strategic Management Journal, 29: 519–543.

14. This section is based on the method developed by Richard Hall, ‘What are competencies?’, in J. Tidd (2012) From Knowledge Management to Strategic Competence, 3rd edn. London: Imperial College Press.

15. Coyne, K. P. (1986) Sustainable competitive advantage: What it is and what it isn’t. Business Horizons, January/February.

16. Leonard-Barton, D. (1991) Core capabilities and core rigidities: A paradox in managing new product development. Strategic Management Journal, 13: 111–125.

Deeper Dive explanations of innovation concepts and ideas are available on the Innovation Portal at www.innovation-portal.info

Quizzes to test yourself further are available online via the Innovation!Portal at www.innovation-portal.info




Cases Media Tools Activities Deeper Dive

• Marshalls

• Zara

• Tesco

• Corning

• Polaroid

• Tesco

• 3M: Breakthrough products and services

• Competitiveness pro" ling

• Functional mapping

• Identifying capabilities

• Blue Ocean strategy

• Business model innovation

• Innovation capabilities in China

Summary of online resources for Chapter 3 –all material is available via the Innovation Portal at




identifying strategic capabilitiesjohnbessant.org/wp-content/uploads/2018/12/tidd1-c03... ·...

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